It Never Gets Old

“Although I’ve made this walk thousands of times, it never gets old.”

-Ed Catmull


That’s how the President of Pixar Animation Studios, Ed Catmull, describes his life in the introduction to an excellent book I started reading this weekend called Creativity Inc. Catmull is a computer scientist who was hired in the late 1970s by a 32 year old by the name of George Lucas.


Catmull went on to run Pixar alongside another American capitalist by the name of Steve Jobs. He is 69 now and his book isn’t as much a memoir as it is a lesson in learning how to be creatively destructive, as a team.


The book’s early chapters will sound quite familiar to those of you who embrace the principles of transparency and trust alongside practical applications of  #math and #behavioral economics: “Honesty and Candor”, “Fear and Failure”, and “Change and Randomness.” #Solid summer time read.


Back to the Global Macro Grind


Walking onto the independent research platform we built 6 years ago never gets old. It gets more interesting and exciting the more we empower new players on our team to be the change. All the while, as my hair gets greyer, I’m still banging out this Early Look note just trying to keep up!


Trying to keep up with no-volume rallies in the preferred hedging instrument of thousands of hedge funds (SPX and E-minis) never gets old either. “Why are we up?”, “Why can’t we go higher?”, “Why can’t I beat beta?” – the underlying whine to this whole thing can make a man want to go on vacation.


Setting aside that we have not been recommending short SPY (we’ve been making the call to short US Growth – i.e. the Russell 2000) here’s what’s going on with the emotion of it all:


  1. Friday’s no-volume-ramp to an all-time closing SPY high of 1900 came on one of the lowest volume days of the year
  2. Total US Equity Market Volume was -23% and -41%, respectively, versus its 1 and 3 month averages
  3. CFTC futures and options contracts in SPX (Index + E-mini) ended with a net SHORT position of -114,248 contracts


In other words, with almost 9,000 hedge funds trying to manage an all-time high in AUM (assets under management) of $2.7 TRILLION in a no-volume market that goes straight up after they shorted it in April-May, the short-term game gets tougher.


Putting the -114,248 net short contract position (SPX Index + E-mini) in context is critical:


  1. That’s -73,347 contracts week-over-week (almost 60% shorter)
  2. Versus the 6 month average of +9,810 net LONG position, that’s bearish positioning
  3. Versus the 1 year average of +62,224 net LONG position, that’s really really bearish

Where time, price, and positioning is relative to where it was, across multiple-durations, is how we analyze things here @Hedgeye. It’s all about the rate of change. And it changes, both fast and slow.


Why would consensus be getting bearish on US Growth?


  1. 10yr US Treasury Yield was only up 1 basis pt last wk to 2.53% = down -50bps YTD and signaling US #GrowthSlowing
  2. Despite its no-volume +2.1% bounce to lower-highs last wk, the Russell2000 is still -6.8% since March and -3.2% YTD
  3. US GDP for Q114 could be revised to NEGATIVE (from its preliminary +0.11%) when it’s reported this Thursday


I know. Everyone nailed it. Everyone you read every morning made the call that US GDP would be negative in the first quarter (it would have been -2% btw if the US government used MIT’s Billion Prices Project measurement of +3.9% inflation) and the 10yr yield would be -17% YTD.


But that doesn’t matter this morning, because the name of the game isn’t intermediate-term TREND investing – it’s short-term performance chasing, baby! So what would get me to saddle up and ride the spooo-hoo bull?


  1. US Dollar Up
  2. Interest Rates Up
  3. Commodity and Cost of Living Inflation Down


Ex #3 (US rents hit an all-time high last week and the CRB Commodities Index was up another +0.8% to +10% YTD), we actually got some of that last week:


  1. US Dollar Index +0.4% last week to back in the black (of +0.4%) YTD
  2. 10yr Yield up a beep (1 basis point) to 2.53%


Buying the all-time-high price in anything just isn’t how I roll. But if that’s the sort of thing you are into from a “long-term investing” perspective, here’s some short-term positivity that Mr. Macro Market looks like he might chase – on a 15-day duration, the SPX and USD have POSITIVE correlation of +0.60.


Yep, that was last year’s risk management call on being long growth (Dollar Up, Rates Up, Equity Growth Multiples Up – Bond Bulls smoked). The 2014 call is much more aligned with the 90-day INVERSE correlation between SPX and USD of -0.62.


Right now, USD is overbought and the bond market couldn’t care less about no-volume stock market rallies. Get USD and Rates right, and you’ll probably get the TREND calls in long growth vs slow-growth right. Although I feel like I have written about this on 1,000 macro mornings – it never gets old.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.47-2.61%

RUT 1089-1135

Nikkei 138

USD 79.99-80.49

WTIC Oil 102.67-104.77


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


It Never Gets Old - Chart of the Day

May 27, 2014

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TODAY’S S&P 500 SET-UP – May 27, 2014

As we look at today's setup for the S&P 500, the range is 28 points or 1.19% downside to 1878 and 0.29% upside to 1906.                                                       














  • YIELD CURVE: 2.19 from 2.19
  • VIX closed at 11.36 1 day percent change of -5.57%


MACRO DATA POINTS (Bloomberg Estimates):


  • 8:30am: Durable Goods Orders, Apr., est. -0.7% (prior 2.9%, revised from 2.6%)
  • 9am: FHFA House Price Index m/m, Mar., est. 0.5% (prior 0.6%)
  • 9am: S&P/CS 20 City m/m SA, Mar., est. 0.7% (prior 0.76%)
  • 9:45am Markit US Composite PMI, May (P) (prior 55.6)
  • 9:45am: Markit US Services PMI, May (P), est. 54.5 (prior 55)
  • 10am: Consumer Confidence Index, May, est. 83 (prior 82.3)
  • 10am: Richmond Fed Manufact. Index, May, est. 5 (prior 7)
  • 10:30am: Dallas Fed Manf. Activity, May, est. 9.2 (prior 11.7)
  • 8:10pm: Fed’s Lockhart speaks in Baton Rouge, La.



    • Obama lands in Afghanistan for unannounced visit with troops
    • White House inadvertently exposes Afghan CIA Chief: WPost
    • Supreme Court may issue opinions
    • Senate, House not in session
    • Washington Week Ahead: Obama to deliver address at West Point



  • Pfizer weighs next move as $117b AstraZeneca bid ends
  • China said to push banks to remove IBM servers in spy dispute
  • GE seeks consent in pledge to keep Alstom nuclear ops in France
  • GE’s Immelt, Siemens’s de Maistre at hearing in France
  • Fox’s X-Men sequel topples Godzilla through holiday weekend
  • Sony forms China Playstation venture in Microsoft challenge
  • Twitter is getting bigger in Asia amid slowing U.S. user growth
  • InterContinental jumps after report co. spurned bid approach
  • ICE plans Euronext IPO, to list in Paris, Amsterdam, Brussels
  • China Hangzhou asks Lilly, AstraZeneca for self-checks: Herald
  • BofA said to find error after change in Fed wording: WSJ
  • Apple seeks order blocking sale of some Samsung smartphones
  • Germany plans Google entries’ mediation service: Handelsblatt
  • Google said to consider acquiring Dropcam: The Information
  • Russia, Ukraine draft gas debt plan as price dispute unresolved
  • Lloyds plans initial public offering for TSB banking division
  • EU austerity rethink demanded as leaders meet post protest vote
  • Poroshenko triumphs in Ukraine vote as Russia open to talks



    • Autozone (AZO) 7am, $8.45
    • National Bank of Canada (NA CN) 6pm, C$1.04 - Preview
    • Qihoo 360 (QIHU) 5pm, $0.35
    • Scotiabank (BNS CN) 6am, C$1.31 - Preview
    • Wet Seal (WTSL) 4:05pm, ($0.18)
    • Workday (WDAY) 4:02pm, ($0.15)




  • Brent Trades Near Four-Day Low After Ukraine Vote; WTI Steady
  • Russian Palladium Flows to Switzerland Jump on Sanction Concerns
  • Solar Farmers in Japan to Harvest Energy With Crops: Commodities
  • Copper Touches an 11-Week High on Outlook for Stimulus in China
  • Corn Slumps to 12-Week Low as U.S. Planting Progress Accelerates
  • Cocoa Climbs to Highest Since 2011 as Robusta Coffee Declines
  • Gold Falls to Two-Week Low in London as Ukraine Outlook Weighed
  • Cocoa Climbs 0.6% to $3,040/T, Highest Since September 2011
  • Rebar Rises to 2-Week High on Optimism China Economy Improving
  • Ukraine Drafts $2.5 Billion Russia Gas Debt Plan to Avoid Cutoff
  • Platinum Producers to Meet With Judge Mediating Strike Talks
  • Shakeout Threatens Shale Patch as Frackers Go for Broke: Energy
  • Russian Gas Reliance in European Union Skews Sanctions Debate
  • COMMODITIES DAYBOOK: Solar Farmers in Japan to Harvest Energy
  • China’s April Gold Imports Drop Amid Lower Investment Demand


























The Hedgeye Macro Team















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Once again the weekly Macau numbers cannot be relied upon



According to the release, Macau generated HK$996m in average daily table revenue this past week, up 27% YoY, and bouncing back from last week’s daily of HK$886m. However, we believe both weeks were placeholders and cannot be relied upon.  Week 2 of May generated revenues of HK$6.2m - the most common placeholder amount.  This past week generated HK$6.975m which has also occurred too many times to be statistically random .  We pointed out the placeholder concept in many notes over the past year.  See "WE'VE BEEN PLACEHOLDERED!" from 04/29/14 for our latest thoughts.


Per usual when a month contains a placeholder week or two, the last week is volatile.  If the month to date numbers were accurate, May would be tracking to finish the month up mid teens YoY.  However, we expect a big catch up in the final week and still believe May could come close to our 20% growth target.


Anecdotally, we're hearing the Mass floors are busy and Premium Mass is doing well.  Mixed reports on VIP but overall, volumes appear decent.


In terms of market share, Galaxy is the only significant outlier with share well above recent trend.  MPEL and SJM remained below their respective 3 month average market share trend.






The People Are Aware

This note was originally published at 8am on May 12, 2014 for Hedgeye subscribers.

“There is hardly a part of the United States where men are not aware that secret private purposes and interests have been running the government.” –Woodrow Wilson


I had a fantastic Real Conversation (HedgeyeTV video here: with best-selling author Jim Rickards last week. Since he suggested we “quarantine the Princeton Economics Department”, I figured I’d quote the 28th US President (who was also President of Princeton).


The People Are Aware - 55


Princeton is a cool place; especially if you go there wearing Blue and White and crush their Tigers at the Hobey Baker rink. While that may be easier for more recent Yale Hockey teams to do, back in my day Princeton was as tough as any team in the league.


There was tough love for the Keynesians in my conversation with Rickards. We talked about the broken Fed model and how the US government doesn’t think about financial market risk the right way. The feedback on this video has been tremendous. Evidently this taps into a new reality – The People Are Aware.


Back to the Global Macro Grind


People in our profession are also very much aware of the real-time score on US Growth expectations falling, fast:


  1. Russell 2000 down another -1.9% last week to -4.8% YTD
  2. Nasdaq down another -1.3% last week to -2.5% YTD
  3. US Consumer Discretionary Stocks (XLY) down another -0.6% to -4.5% YTD


But, but, the Dow “hit an all-time high” on Friday (which puts it dead flat on the YTD #joy). So make sure you own everything in the Dow that is:


  1. Slow-growth
  2. Low-beta
  3. High-Yield


But you already have that on because that has been the strategy and asset allocation decision to make for the last 4.5 months. While that may not be trivial to someone who hasn’t evolved their process, in modern day markets real-time risk managers look at what we call Style Factors:


  1. Slow-growth stocks (Bottom 25% of the SP500’s EPS Growth is +5.2% YTD)
  2. Low-beta stocks are +6.1% vs High-beta up a paltry +0.4% YTD
  3. High-dividend-yielding stocks are +3.9% for 2014 YTD


“So”, what is driving slower-growth-hamster-on-the-wheel #YieldChasing? That’s too easy. It’s the Fed’s Policy to Inflate:


  1. So you buy inflation protections via TIPs
  2. Or you buy inflation by buying inflation itself (Oil, Food, Gold, etc.)
  3. Or you buy bonds and/or anything that looks like a bond as slower-growth-expectations drive down interest rates


Of course you’d have to let go of most academic ideologies that bonds don’t do well during #InflationAccelerating, and embrace that the Bernanke/Yellen Fed has 0% credibility on fighting inflation. I don’t know how many more times I can rant about this in print – that’s why I went to the video!


How about that stuff the Fed calls “non-core” (like ripping US rents and food) last week?


  1. CRB Foodstuffs Index up another +0.6% last week to +23.7% YTD
  2. Soybeans up another +1.1% to +11.6% YTD
  3. Corn up another +1.6% to +16.1% YTD


Yep. If you don’t like that definition of #InflationAccelerating, eat a REIT – and like it. Last week the MSCI REIT Index was up another +1.2% to +14.1% YTD, which means that you can bet your Madoff that rents are going higher in this country, not lower.


Oh, did I mention being long of US Housing in housing and/or related construction stocks terms (ITB) sucked wind again last week? For some reason this and most of the aforementioned market realities didn’t make it into Hyman’s weekly update. ITB (Housing) is down -6.4% YTD.


But never mind what Old Wall economists who missed calling the Q1 08’ and Q1 11’ slowdowns in US consumption growth think. As the early response to my un-plugged video with Rickards reminds us, The People Are Aware now. And that’s progress.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.56-2.67%

SPX 1869-1889

RUT 1189-1117

USD 79.18-80.08

EUR/USD 1.37-1.39

Gold 1278-1314


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The People Are Aware - Chart of the Day


Takeaway: Current Investing Ideas: GLD, HCA, HOLX, LM, LO, OC, RH, and ZQK

Below are Hedgeye analysts' latest updates on our EIGHT current high-conviction investing ideas and CEO Keith McCullough's updated levels for each.


We also feature three research notes from earlier this week which offer valuable insight into the market and economy.



Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers.

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less


INVESTING IDEAS NEWSLETTER - Inflation.AvgAmerian5.22.2014 


GLD  We added Gold to Investing Ideas this past week. Click here to read the full report.

HCA –  Hedgeye Healthcare sector head Tom Tobin remains bullish on HCA Holdings, but has no new updates this week. 

HOLX ­­– We’re continuing to see a nice acceleration in facility conversions to 3D Tomosynthesis in our data.  The chart below shows the result from the update we ran earlier this morning.  Facility counts and the placement rate continue to climb.  The pace needs to pick up next month, however to hit our near term estimates, although the announcement of a reimbursement code should help if we’re right on what we think the agency does. Next week we are hosting a call with a leading expert in the field.  He has one of the most detailed perspectives on what CMS will decide for a reimbursement for 3D Tomosynthesis.  




LM –  Our weekly tracking of mutual funds flows from the Investment Company Institute remained defensive this week with the combination of taxable and tax-free bond funds having another strong week of production with $3.9 billion in inflow, well above the running year-to-date average for 2014 of $2.1 billion per week. Conversely, equity funds had only the third net outflow of the year with $1.0 billion leaving all equity mutual funds, well below the year-to-date average of a $3.1 billion inflow. This emerging defensive posture by investors is very favorable for Legg Mason with 55% of its assets-under-management in bonds, the largest exposure in the traditional asset manager group.




LO – Once again rumors swirled this week that Lorillard  is going to get taken out. We think the market is getting over its ski tips on an imminent timetable for a deal given acquisition challenges.


We maintain our Best Idea Long Call Lorillard (presented on March 4 of this year). We think investors are best served to ride out the rumor mill pushing the stock higher as we don’t expect an imminent deal, and maintain that LO is fairly valued as a stand-alone or takeout target at $80/share (more below).


We view a hypothetical deal (especially an imminent one) between RAI and LO as challenged on three main factors:

  • Our main flag is that a combined RAI + LO would own ~ 67% of U.S. menthol market, which we believe should trigger anti-trust flags.
  • Big tobacco is already a highly concentrated industry in the U.S. across the big three – MO has a leading ~51% of market share; a combined RAI + LO would equate to ~ 42% share.   
  • BAT may look to maintain or increase its ownership in RAI (for the remaining 58%), however it cannot act until July of this year when a 10-year standstill agreement between it and RAI expires.

A scenario suggests that RAI could look to divest such menthol brands as Kool, Winston and Salem (~5% total market share), which could serve to change the consideration of the FTC/DOJ, however all of this shopping would take time.


As part of the Best Idea’s thesis we did not consider a RAI + LO deal. We think the decision to replace CEO Daan Delen with Susan Cameron, who held the CEO seat for 7 years ending in 2011, is contributing fuel to the speculation that she wants to come out of the box “strong” with this deal. 


Our thesis is built on the superior fundamentals of the Lorillard portfolio:

  • We do not see Menthol Regulation Risk from the FDA over the medium term (1-2 years) and assign less than a 20% probability over the long term.
  • We expect blu e-cigs to benefit from first mover advantage and maintain leading market share despite competitive pressures from Big Tobacco’s entry into the category. Looking out 5 years to 2018, we model blu’s earnings contributing 31% to total LO, and accelerating earnings growth in the combined company.
  • We expect strong and stable menthol fundamentals driven by lasting consumer and demographic trends that differ from traditional tobacco.

We maintain a fair value $80/share target would equate to a price 30% higher than today’s, so we think it pays to hold on to LO amidst the rumor winds!

OC – While the US residential housing market appears to be softening, residential home improvement spending continues to rebound from its post financial crisis lows. Owens Corning  should benefit from tightening building codes and improved competitive dynamics in coming years.  Shorter-term, we suspect that the company may benefit from a bounce-back in activity from earlier weather-related weakness.




RH – William’s Sonoma (WSM) reported earnings on Wednesday (5/22) after the close and the company reported a 10.0% consolidated comp – 85% above consensus estimates. More importantly, WSM’s two flagship furniture banners, Pottery Barn and West Elm, posted 9.7% and 18.8% comps respectively.


We view the event as a ‘State of the Union’ on the high-income consumer. There has been some trepidation surrounding the US consumer, much of it warranted in light of the less than positive 1Q earnings season to date. But, the concepts skewed towards the high-income subset have been resilient, i.e. KATE, TIF, and WSM. This gives us stronger conviction in our 1Q Restoration Hardware  estimates which call for a 15% retail comp compared to the street at 10%.


ZQK –  Quiksilver had a 9% rally over two days for one reason and one reason only – the company announced its quarterly reporting date of June 2. The company has had a wall of silence since the second quarter ended last month and gave zero indication to the Street as to when it would release earnings. That might be acceptable for a $10bn market cap company that actually earns money, but in this market it is certainly not acceptable for a company like ZQK. This is a company that has to be massively shareholder-friendly – and the fact is that it is not. It has to seriously upgrade its investor relations/communication program. Most notably, the Street perceives the announcement as an indication by ZQK that it will not tank the quarter. Presumably, if the company were to preannounce, it would have done so alongside the announcement of its earnings date.  We still think that ZQK is just emerging from its darkest hour. After 1.5 years of a new management team making all the tough decisions, we should start to see margin improvement and top line growth in 2H. As we’ve stated all along, we think it will be acquired at a double digit price sometime over 24 months.


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YELP: Chat with the CFO

Internet & Media analyst Hesham Shaaban had an honest and forthcoming conversation with YELP CFO Rob Krolik but is reiterating the short.


LINN Makes 1st Permian Trade & Nothing Changes

Energy analyst Kevin Kaiser analyzes LINN Energy and ExxonMobil's announcement of an asset swap.



DRI: Simply Egregious

Restaurants sector head Howard Penney explains why he is still stunned by the sheer arrogance of Darden management.


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